Thanks to cheap home prices and mortgage rates at historic lows, it’s easy to argue that now is the ideal time to buy a home. But many would-be buyers are worried the market hasn’t yet reached bottom, and years of plunging home values and foreclosures have scared some off—understandably so. There’s one thing we can be fairly certain about, though: Based on rising rents, right now is a terrific time to be a landlord.
For months now, buying a home has theoretically been cheaper than renting. A study released in March showed that buying was less expensive than sending monthly checks to a landlord in 98 out of 100 major U.S. metropolitan real estate markets.
And yet, demand for rentals has remained high—and rent prices reflect it. In the latest report from real estate site Trulia, while average home prices remain mostly flat, rents in May rose 6% compared to May 2011. Renters in some cities face monthly bills that are rising far more than average: Rents have increase more than 10% in San Francisco, Oakland, Miami, and Denver, and between 9% and 10% in Boston, Seattle, and Houston. Of the 25 largest U.S. markets, only one—overbuilt Las Vegas—experienced a decline in rent prices.
If rents are soaring at a time when buying is already considered cheaper than renting in much of the country, why aren’t more people pulling the trigger and purchasing homes? As mentioned, many are probably freaked out by the convulsions of the real estate market in recent years. They also might not qualify for credit, or perhaps they just don’t want the stresses of homeownership—including upkeep and mortgage payments, being tied down to one property in one location, and of course, the unpredictability of the market and the economy as a whole.
For all of these reasons and more, the prototypical American dream—the one revolving around homeownership—appears to be changing slightly. During the immediate aftermath of the housing market collapse, homeownership seemed like more of a nightmare than a dream for many.
Young singles were the first to shift away from buying homes, for obvious reasons starting with student loan debt, a poor jobs market, and the stronger-than-average likelihood that they might move in the near future. Now, reports USA Today, a different breed of Americans is embracing renting as their American dream: single families with older kids still living at home.
Traditionally, people in this demographic are among the most likely to own homes. Some single-family renters have recently lost homes in foreclosure, and they can’t or don’t want to buy again. Others simply don’t want to buy, not now at least. Owner-occupied homes are the minority in cities such as Las Vegas and Phoenix, and around 40% or more of residents are renters in Chicago, Austin, and San Antonio, according to Census data.
Whereas would-be buyers are shying away from home purchases, investors are stepping in. The real estate firm Colony Capital has snatched up more than 1,000 homes, mostly in Arizona, California, and Nevada, that it plans on renting, and the company says it’ll drop at least $1.5 billion next year on single-family rental homes. The Chicago Tribune recently reported that the “red-hot” single-family rental market could be worth upwards of $3 trillion.
Individual investors have been active as well. In 2011, the number of homes bought for investment purposes rose 65%, accounting for more than 25% of all home-purchase transactions last year.
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And who can blame these investors? They see low purchase prices, combined with low mortgage rates, in markets where rents rise and rise. That’s a dream scenario for landlords.